Don’t kill the Consumer Financial Protection Agency

The WSJ is reporting that Christopher Dodd is flirting with giving up on the idea of a stand-alone Consumer Financial Protection Agency. The House’s financial-reform bill included such an agency, albeit in a form watered-down from what the Obama Administration initially envisioned. According to the WSJ, Dodd will only agree to take the agency out of the Senate version of the bill if some other, existing federal agency (like Treasury) gets a new, stronger consumer-protection division.

That would be a bad trade. Getting a stand-alone agency is important. Here’s why.

A stand-alone Consumer Financial Protection Agency (CFPA) is not just about the regulations it creates or enforces. A stand-alone CFPA is about putting consumers—that is, ordinary people—at the center of the conversation about the nation’s financial system. How we structure our bureaucracy helps to form the way we think about public policy issues. A stand-alone agency recognizes and empowers consumers as a discrete group when it comes time to discuss everything from home loans to credit-card fees.

The financial-services industry has vociferously opposed the creation of a CFPA not because of any specific oversight authority is would have. In fact, almost all of the power the CFPA would possess is already in the hands of a hodgepodge of other federal and state agencies. What would be different would be the crystallized way the CFPA’s worldview would start and end with the consumer. The CFPA would give the users of financial products a clear and distinct advocate in government.

We may like to think that regulators are a check on business, that the two work in direct opposition in order to come to a fair middle ground. The reality, of course, is otherwise. When regulators form opinions and craft regulations they are deeply influenced not only by lobbying, but also by the mindset and mission of the agency for which they work. The Federal Reserve and Treasury have, above all else, a duty to keep the larger financial system safe. That’s great, I want them to do that. But that type of mandate does inculcate a different worldview—and a different set of priorities—than would emerge from an agency with only the little guy in mind.

Keep in mind that people at places like the FDIC and the Federal Reserve did know that there were major problems brewing in subprime mortgages. That knowledge, though, didn’t compel those people and their bosses to action because of the institutional framework in which they operated.

Could a consumer-protection division embedded within the Treasury Department do everything that a stand-alone outfit could? Sure. It could. But I’m fairly certain it wouldn’t.